New to the Live Richer Challenge: Homebuying Edition? Learn more about it HERE.
Need to catch up? Click on the link where you left off and then come back!
Day 2: Purchasing Methods
Day 3: Your Capacity
Day 4: Qualifying Income
Day 5: Debt-to-Income
Day 6: Review, Reflect, Relax
Day 7: Weekly Inspiration
Week 2: Home Loan Requirements
This Week's Goal: Understand how credit plays a role in the homebuying process and learn the eligibility requirements for popular homebuying programs
Today’s Easy Financial Task: Get your credit reports and scores.
How to rock this task:
- Learn how credit plays a role in the homebuying process.
- Watch a FREE web class on how I improved my credit score from 547 to 752 in just two years!
- Check your credit report and score for free.
Welcome to the second week of the LRC: Homebuying Edition!
Did you enjoy the last week’s tasks? This week we have an entire new set of tasks that will get you one step closer to buying a home. Let’s go!
What’s character got to do with it?
Last week, I gave you an overview of the 5 C’s. They are — character, capacity, capital, conditions, and collateral.
Today we’re going to dig into the character element of the 5 C’s of Credit.
Character is defined as your trustworthiness and creditworthiness.
Lenders want to lend to borrowers who they determine are responsible and will pay the money back. Your character, or credibility, plays a major role in how they determine whether or not you’re qualified.
How does a lender review your character (aka your creditworthiness)? They take a look at your credit reports and credit scores.
When looking at your credit report, lenders usually check:
- How much debt you owe: We talked last week about your debt-to-income ratio and how it tells you and your lender how much home you can afford. (Go back to Day 5 if you missed it.) Lenders look at debt from your credit reports and what you write on your loan application to make this calculation.
- Your credit utilization: Credit utilization is a comparison of your credit balances to your credit limits. To calculate your utilization, divide your credit balances by your credit limits. For example, say you have a:
- $1,000 balance on Credit Card A with a limit of $2,000.
- $3,000 balance on Credit Card B with a limit of $5,000.
- You add up your balances, which equal $4,000.
- Then you add up your limits, which equal $7,000.
- Divide your balance by the limit ($4,000 / $7,000 = 57%). The ideal credit utilization is below 30%. If you’re using a high percentage of your balance, lenders could think you’re using it as a crutch, which could make you seem like a less creditworthy candidate.
- How long you’ve had credit history: Length of credit history is another indicator of your character and creditworthiness. You may be able to qualify for a mortgage with a short credit history, but a long one could also tip the scale in your favor. A long history of managing credit responsibly is an indicator that you’ll be a responsible borrower.
- If your payments are made on time: Lenders are looking for evidence of on-time payments. Accounts with positive payment history are a sign to lenders that you’re also likely to make on-time mortgage payments.
- Any other negative records: Records like bankruptcy, foreclosures or tax liens will be closely examined on your report. These types of records can be red flags for lenders, but doesn’t mean you won’t be eligible for a home loan. A certain amount of time has to pass before you can qualify for a home loan after bankruptcy or foreclosures. For example, the waiting period for bankruptcy is two to four years depending on the mortgage. Be honest on your mortgage application about your history. Items may drop off your credit report, but there are other backup systems where your history may show up for lenders.
Your Credit Score
Your credit score is a risk score assigned to you based on the items in your credit history. Lenders also look at your credit score to measure creditworthiness. There are different scoring models used to calculate credit scores.
The one most commonly used by lenders is the FICO score.
Here’s how the FICO model calculates your credit score:
- 35% of your score — Payment history — The most important factor is your record of on-time payment history. Late payments will have a major impact on your score. However, a recent history of on-time payments can help improve your score.
- 30% of your score — Amounts owed — How much of the available credit that you’re using. The lower the better here, as your credit utilization is considered. Ideally, you want this percentage to be below 30%.
- 15% of your score — Length of credit history — How long you’ve had different accounts. The older your accounts, the better.
- 10% of your score — New credit — How many hard inquiries you have on your report. Inquiries are credit checks. A lot of credit checks can be a signal that you’re overusing debt vehicles. Try to keep your inquiries to a minimum, unless you’re shopping around for loan products like mortgages or auto loans. When shopping for these products, multiple inquiries within a 45-day shopping period generally counts as one inquiry.
- 10% of your score — Credit mix — The mix of accounts that you have. Showing that you can manage a mix of credit accounts (aka credit cards) and installment loans (auto loans, a mortgage, etc.) can be good for your score.
Your Tasks for Today
You have four tasks to complete today:
1.Watch the web class: Did you know I increased my credit score from 547 to 752 in only TWO YEARS? Take a moment to watch the free workshop on how I made it happen here.
2. Check your credit report: To clean up your credit report, you have to know where you stand. There are three credit reporting agencies — Experian, TransUnion, and Equifax. These credit bureaus store your information from creditors. Each year, you’re able to get one free credit report here. If you’ve already used your free credit reports for the year, head down to task number two. I have a solution!
3. Check your credit scores: Free credit reports don’t come with a credit score, that’s why I recommend my favorite place for credit reports and scores…Credit Sesame! Credit Sesame offers free credit scores AND reports. Sign up for free here.
4. Do you need help getting your credit reports in order? Obtaining and maintaining good credit is key to qualifying for a decent mortgage. Each section of your credit report is important and can have an impact on your score. Netiva “The Frugal Creditnista” Heard has a 5 Day Credit Challenge that will teach you how to read and break down each section of your credit report. Grab access to the free challenge here!
That’s it for today’s tasks! Make sure to check in with your accountability partner(s).
You can also head into the Dream Catcher Facebook Group to communicate with other Dream Catchers working through the Challenge.
Today I checked my credit report and scores to prepare myself for homebuying. Day 8: #LiveRicherChallenge Click To Tweet
You can reach out to me here:
Facebook: The Budgetnista
Private Forum: Dream Catchers: LIVE RICHER
Want to work through the Live Richer Challenge: Homebuying Edition in a workbook? It's part of a bestselling series!
Click the link below and get your copy.
P.S. If you haven't already... Get your Challenge Freebies from our Live Richer Challenge: Homebuying Edition coauthor, Netiva Heard. Click the pic below if you'd like to learn more about Netiva's services. You'll receive a discount! Just let her know you're a Dream Catcher.
P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.
P.P.P.S. Don’t forget to get your free Live Richer Challenge: Homebuying Edition Starter Kit. Download it HERE.
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